State of the Union

[Jake]

Well I've pointed out the main reasons - private lenders versus the government, and re-payment options. The government also can't selectively choose who it loans money to. The only requirement, that i'm aware of, is whether the person is going to school. A person could be dirt poor with no prospect of paying it back and the government is still giving them money. Private lenders can appreciate that risk and build it into the loan and/or their business. Same with credit card companies. The government can't.

 

Bear in mind that "being in college" is supposed to be a bar that is cleared that makes the person somewhat likely to pay back. This is part of the reason there has been some push towards stopping public loans to for-profit colleges and other particularly unsuccessful institutions. The government is also making money on these loans, so as it is they've built enough risk into the disbursement of them that they aren't being gamed on a large scale. Still, I don't think it should be a program based primarily on whether the government can break even on the loans. The outcome for society - more education, economic stimulus, etc. - should be the goal and the costs just have to be reasonable given those goals. This is opposed to we must have some arbitrary cost with little regard for the level of benefit derived from it.

[Jenksismyhero]

Bear in mind that "being in college" is supposed to be a bar that is cleared that makes the person somewhat likely to pay back. This is part of the reason there has been some push towards stopping public loans to for-profit colleges and other particularly unsuccessful institutions. The government is also making money on these loans, so as it is they've built enough risk into the disbursement of them that they aren't being gamed on a large scale. Still, I don't think it should be a program based primarily on whether the government can break even on the loans. The outcome for society - more education, economic stimulus, etc. - should be the goal and the costs just have to be reasonable given those goals. This is opposed to we must have some arbitrary cost with little regard for the level of benefit derived from it.

 

Yeah for-profit schools are terrible. I don't know why people go there. Community college is clearly a better option.

 

I'm curious about that "making money" claim. Here's an explanation by the Washington Post that argues any profits are based on the CBO's methodology:

 

As New America's Jason Delisle has explained, that's because the Congressional Budget Office is required by law to use a bizarre and faulty method for determining the cost of government loans.

 

Just like any institution, the CBO determines the cost of loans by "discounting all of the expected future cash flows associated with the loan or loan guarantee—including the amounts disbursed, principal repaid, interest received, fees charged and net losses that accrue from defaults—to a present value at the date the loan is disbursed." To do that, it needs to settle on a "discount rate," which is usually the expected rate of return on the loan in question. Banks and other private institutions generally estimate that by finding loans with similar risks and maturities to the one being evaluated, and then using those similar loans' rates of returns.

 

The CBO does not do that. It discounts all government loans using the returns on Treasuries of similar maturity. So a 30-year student loan would be compared to a 30-year Treasury bond. But Treasuries are the safest bonds in the world. The U.S. government does not have a very high risk of defaulting, not least since it prints its own money. Student loans are much, much riskier. The default rate at four-year public colleges and universities is around 4 to 5 percent. To capture the true risk of these loans, you'd need to discount using the rate of return for another loan with similar risk. Comparing them to Treasuries make them seem safe no matter what the actual risk.

 

Delisle likes to explain this by comparing student loan risks to the risks of Greek government bonds (which hold a very high risk of default). The CBO methodology, says "would show buying up all the Greek bonds as profitable." That's because you're using Treasury bonds to pay for a much riskier bond, and counting the higher returns you get from the bond, but not taking the risk of default into account. Of course that's going to show up as profitable! But it's not how any business handles its books. "You're swapping safe assets for risky ones and the bigger the difference the bigger it appears the profit is," Delisle says.

 

http://www.washingtonpost.com/blogs/wonkbl...-student-loans/

 

 

[illinilaw08]

Well I've pointed out the main reasons - private lenders versus the government, and re-payment options. The government also can't selectively choose who it loans money to. The only requirement, that i'm aware of, is whether the person is going to school. A person could be dirt poor with no prospect of paying it back and the government is still giving them money. Private lenders can appreciate that risk and build it into the loan and/or their business. Same with credit card companies. The government can't.

 

Ok - that's our disconnect. Private student loans are afforded the same priority as government student loans under the Bankruptcy Code.

 

I can see the argument that debt to the government should be treated differently than private debt. I don't necessarily buy that argument, but I see where it comes from.

 

I also see the argument that private debt for education needs to be more difficult to get rid of in bankruptcy because the alternative is to push lending costs much higher (greater risk of default). But that's why getting private banks out of lending for education (the government increases the amount of direct loans you can take and reduces the interest rate on that debt) would be sustainable policy.

 

Right now, the cost of education - when that cost doesn't yield the promised benefits - is basically impossible to get rid of - and that's a huge problem.

 

EDIT: The question regarding the means of the person applying for the loan are, I don't think, particularly relevant to whether educational loans are a good investment or not. Particularly since there is no expectation that the federal loans are repaid immediately. The money is loaned out on the expectation that a college degree is a solid investment...

Edited January 28, 2015 by illinilaw08

[caulfield12]

I don't think we want to see a system where those with 2000+ SAT scores to 3.5+ GPA's get more access to government loans.

 

Maybe those are better bets from a private lending perspective, but you can't punish all the students from poorer-performing schools (who are logically at higher risk of eventual defaults) by assuming they won't be able to get higher-paying jobs or won't even graduate. That's just going to end up (once again) concentrating more wealth in the hands of fewer people at the top of the pyramid.

 

 

I do strongly believe the government shouldn't allow loans to be used for those for-profit schools like the University of Phoenix or Kaplan University where the disconnect between future promises made and the actuality of the job market graduates are facing is so high.

 

In the end, that's just another version of the payday loans scam (the monthly fees for those who don't have access to a banking institution/checking account/ATM or debit card) for many minority students...they get sucked into paying higher interest private loan rates for a lower educational return on investment.

 

The pendulum has really shifted in that regard, back to the vocational/trade schools side...although how long even those positions will survive the technological revolution is debatable.

Edited January 28, 2015 by caulfield12

[farmteam]

It's not like there aren't other benefits provided by the government to students: pretty favorable lending, tax deductions of interest on the loans, continuing education credits, etc.

What?

[caulfield12]

What?

 

 

I'm assuming he means the lower interest rates.

[Jenksismyhero]

I'm assuming he means the lower interest rates.

 

And few requirements to qualify.

[farmteam]

I'm assuming he means the lower interest rates.

I wouldn't call them low interest rates.

[gatnom]

I wouldn't call them low interest rates.

 

A significant portion of my loans were 6.7% when I graduated, but I believe they just about halved that rate recently...

 

 

 

 

[EvilMonkey]

A significant portion of my loans were 6.7% when I graduated, but I believe they just about halved that rate recently...

And your rate for a person with no job, probably no or little credit and no collateral who wasn't going to be paying them back for years would have been much higher in a private setting.

[illinilaw08]

And your rate for a person with no job, probably no or little credit and no collateral who wasn't going to be paying them back for years would have been much higher in a private setting.

 

The student loan bubble is both federal debt and private debt. As discussed earlier, at least when I went to school (graduated 6+ years ago), the federal loans were not enough to reasonably cover tuition + room and board. So that means you take debt from the private sector.

 

The private student loan debt doesn't have a comparable instrument in the private sector. You literally cannot get rid of private student loan debt the way you can any other private debt. So if the risk of total default to the lender is practically zero, why are interest rates on student loans as high as they are?

 

 

[NorthSideSox72]

The student loan bubble is both federal debt and private debt. As discussed earlier, at least when I went to school (graduated 6+ years ago), the federal loans were not enough to reasonably cover tuition + room and board. So that means you take debt from the private sector.

 

The private student loan debt doesn't have a comparable instrument in the private sector. You literally cannot get rid of private student loan debt the way you can any other private debt. So if the risk of total default to the lender is practically zero, why are interest rates on student loans as high as they are?

You are conflating bankruptcy laws with default, which paints an innacurate picture.

 

If a person goes bankrupt they can discharge debts, but almost never student loan debts. So it is true that the risk of a DISCHARGE via a legal maneuver is very low.

 

However, a person could certainly just stop paying on the loans, for whatever reasons. And whether or not they seek bankruptcy protection, that still ends up being a DEFAULT on the loan. So the default risk is still there and still significant.

 

[illinilaw08]

You are conflating bankruptcy laws with default, which paints an innacurate picture.

 

If a person goes bankrupt they can discharge debts, but almost never student loan debts. So it is true that the risk of a DISCHARGE via a legal maneuver is very low.

 

However, a person could certainly just stop paying on the loans, for whatever reasons. And whether or not they seek bankruptcy protection, that still ends up being a DEFAULT on the loan. So the default risk is still there and still significant.

 

Yes - I did not use the proper terms of art, but the bank still has significantly lower risk when the debt can't ever go away.

 

If I default under the terms of the note I signed with the holder of my student loan debt, they file suit, obtain a judgment, and garnish my wages/bank accounts until paid in full. I don't have the recourse of filing bankruptcy. The bank incurs the cost of collection, but the risk of a complete loss under the loan went way down.

 

That risk is different than the specific bankruptcy default which means that any repayment to my creditor is dependent on having non-exempt assets that a trustee can sell and use to pay creditors.

 

The second statement is correct - someone can stop paying the loans for any reason at all. But the lender has plenty of remedies to recover the debt. Regardless, the lack of risk of a bankruptcy discharge makes the likelihood of the lender recovering significantly higher and should lead to lower borrowing costs.

[NorthSideSox72]

Yes - I did not use the proper terms of art, but the bank still has significantly lower risk when the debt can't ever go away.

 

If I default under the terms of the note I signed with the holder of my student loan debt, they file suit, obtain a judgment, and garnish my wages/bank accounts until paid in full. I don't have the recourse of filing bankruptcy. The bank incurs the cost of collection, but the risk of a complete loss under the loan went way down.

 

That risk is different than the specific bankruptcy default which means that any repayment to my creditor is dependent on having non-exempt assets that a trustee can sell and use to pay creditors.

 

The second statement is correct - someone can stop paying the loans for any reason at all. But the lender has plenty of remedies to recover the debt. Regardless, the lack of risk of a bankruptcy discharge makes the likelihood of the lender recovering significantly higher and should lead to lower borrowing costs.

There is definitely lower risk of any sort of loss to the bank, that is true. Just not zero risk. Also worth noting, this is unsecured debt, and when a loss does occur, usually these people have nothing to claw back. Even wages may be so low as to be unusable for this purpose.

 

That all said I agree that, in theory, overall loan rates should be lower. It's a racket.

 

[Y2HH]

There is definitely lower risk of any sort of loss to the bank, that is true. Just not zero risk. Also worth noting, this is unsecured debt, and when a loss does occur, usually these people have nothing to claw back. Even wages may be so low as to be unusable for this purpose.

 

That all said I agree that, in theory, overall loan rates should be lower. It's a racket.

 

Agreed.

 

The government should either shut down private student loans, or at least remove them from the protected list so they can be bankrupted away in case such a need arises. In such a catastrophic circumstances, the debt following the person through bankruptcy isn't going to do much good for anyone, because it's obvious they're not paying it back at that point.

 

These specific types of loans are an investment in the countries future, so the government should give them out at very low interest rates, and any interest made should be put toward paying down other student loans for those that default on them. The tax money generated by people getting a good education and a job after graduation is more beneficial to the country as a whole than high interest on these loans.

 

Of course, as with any such program, certain rules/regulations would need to be put in place to assure the investment remains in the US after graduation. If you borrow low interest government loans only to leave and work in a foreign country when you graduate, the interest rate could be adjusted by such a choice. Or something.

[southsider2k5]

Out of curiosity, on the open market, what would an unsecured loan to someone without an education, job, or credit history usually get for an interest rate?

[Y2HH]

Out of curiosity, on the open market, what would an unsecured loan to someone without an education, job, or credit history usually get for an interest rate?

 

No idea, I'd imagine not a very good one, though. The loan game is inherently unfair to the people that actually need to borrow money the most.

[southsider2k5]

No idea, I'd imagine not a very good one, though. The loan game is inherently unfair to the people that actually need to borrow money the most.

 

My thinking is that 6% isn't really bad. Think about it, mortgages are where now 4%? 3.5%? Those are asset backed securities. People getting mortgages have incomes.

[NorthSideSox72]

My thinking is that 6% isn't really bad. Think about it, mortgages are where now 4%? 3.5%? Those are asset backed securities. People getting mortgages have incomes.

Secured loans - not asset backed securities.

 

If those mortgages were then packaged into a REIT or swap or some sort of other instrument, then that is an MBS (a type of asset backed security).

 

Nuance.

 

[ptatc]

No idea, I'd imagine not a very good one, though. The loan game is inherently unfair to the people that actually need to borrow money the most.

Isn't this based on the fact that people who really need it have a greater risk of not paying it back?

 

Wasn't this was one of the primary factors of the housing crash. Too many people who were at too great of a risk of not paying it back were loaned too much money.

 

Or is this simplifying it too much?

[StrangeSox]

Isn't this based on the fact that people who really need it have a greater risk of not paying it back?

 

Wasn't this was one of the primary factors of the housing crash. Too many people who were at too great of a risk of not paying it back were loaned too much money.

 

Or is this simplifying it too much?

 

Depending on how you read your first sentence with the third, not exactly. There have been numerous studies looking into the causes, trends, etc. and there really isn't much evidence poorer borrowers being the primary cause. The third sentence in isolation is more less or correct in that too many people at too great of a risk of not paying it back were loaned too much money, but what this most recent study found is that people were overextending themselves across the income scale:

 

http://www.vox.com/2015/1/26/7897035/poor-...crisis-mortgage

 

It's normal for poorer households to be deeper in debt on their homes; they're less likely to be able to afford large down payments. But mortgage debt relative to income didn't change much for any income group between 2002 and 2006. Again, if the story of poor households racking up more and more unsustainable debt were true, you'd expect to see the debt-to-income ratios of the bottom few deciles shooting up. But that didn't happen. It grew only a tiny bit for the poorest households, and fell for everybody else.

 

But the most revealing chart in the paper might be the one showing mortgage delinquencies within three years of mortgage origination broken down by income. Keep in mind that delinquencies for mortgages starting in 2005 and 2006 could have occurred in 2008 and 2009, when the crisis hit. The dataset here wouldn't show financial crisis delinquencies for mortgages starting before that. (Note: the dataset the authors use for this doesn't have income numbers for individual borrowers, so the authors used average income by zip code.)

 

 

and then of course what could have been a relatively isolated mortgage default problem was hugely amplified by all sorts of "AAA rated" mortgage-backed securities and credit default swaps.

 

So, generally speaking, yes, the root of the problem was banks/mortgage brokers telling people they could take out loans much larger than they could actually afford because the banks were just going to securitize or sell those mortgages right away anyway and people taking these loans that the banks assured them they were qualified for. But if by "those who really need it" you mean people with lower incomes, then no, they weren't more of a cause than any other income group.

Edited January 30, 2015 by StrangeSox

[Jenksismyhero]

The one comparison you can make is whether we should be pushing people and businesses towards things, e.g. owning a home and going to college. Obviously the end result is something we want, but is it really right for everyone? I'd argue, no, it's not. Some people should be renting, and some people should not go to college. Both can be too much of a burden that just makes things more difficult in the end.

[StrangeSox]

While not everyone might want to go to college, I don't think "how much money your parents have" is one of the hurdles they should have to clear if they want to.

[Y2HH]

Isn't this based on the fact that people who really need it have a greater risk of not paying it back?

 

Wasn't this was one of the primary factors of the housing crash. Too many people who were at too great of a risk of not paying it back were loaned too much money.

 

Or is this simplifying it too much?

 

Two different situations.

 

Yes, people who need to borrow the most are usually at a higher risk of defaulting, but it's not always that simple. Some of this is predatory in nature, taking advantage of those that CAN pay it back, but can't come up with the money right at that moment.

 

The housing collapse wasn't due to this, though, that was a whole other ball of wax. That was predatory lending in a downright evil fashion. What they were doing was selling people outright lies.

 

Here is how it worked, in a nut shell:

1) Convince you that you can afford to be a home owner by taking advantage of an adjustable rate mortgage, which start at very low interest rates, and quickly balloon after a set number of years, usually 5 or so.

2) Show you the simple math that at the low introductory interest rate of the loan, you can easily afford the house. Yay, American dream realized!

3) Drive the sale home on the idea that when the interest rate rises, that you simply refinance at a lower interest rate all over again. Yay!

 

Step 3 was the lie that sold the package. People with bad credit cannot simply "refinance". When they try, and they did, they were told in no uncertain terms, "go f*** yourself". Which leads to their interest rate skyrocketing on their original loan, which leads to them no longer being able to afford the house, which leads to default.

 

They knew step 3 would fail when they sold them the loan, and they didn't care, because by then 5 or so years would have passed and they'd never see that person again. That said, they KNEW those people would default...and the idea was to just re-sell that default to another poor sucker with another adjustable rate loan, and rinse/repeat, all while collecting the insurance on the failed loan.

 

They knew those loans were junk, so they came up with the idea of packaging loans by taking a really good loan, packaging it up with that really s***ty "sure to default loan", sending it to a ratings agency ran by a friend of theirs who would rate the packaged loans of "AAA" quality, making them back-able by insurance, and selling it off to Freddie Mac or Fannie Mae, or whoever else would buy it. And when the bad loan defaulted, call in the insurance claim on the loan -- "AIG" -- and when they all defaulted at the same time, AIG didn't have the money to pay off the insurance claims...so the whole house of cards fell down.

 

Edited January 30, 2015 by Y2HH

[StrangeSox]

Just to add to that a bit, the banks and mortgage brokers would also knowingly and willingly lie on the paperwork or encourage the borrow to lie, or they'd simply hand out money with no verification whatsoever in NINJA loans.

 

But the big investment banks also started to believe in their own MBS snake-oil and held on to a later of the paper themselves. Or maybe they knew it was garbage but didn't care because they were making huge fortunes every year and knew that, even when it all hit the fan, they'd still be walking away with millions.